Thursday, October 6, 2011

Diary: IPC, spinoffs

ICP - Intermediate Capital - 198p/£791m
ICP provides mezzanine finance, leveraged credit, and minority equity. The trading update, released today, reveals:
  • The events of the summer have further highlighted the imbalance between supply
    and demand for credit which will remain a feature of the European credit markets
    for the foreseeable future.  This imbalance is placing considerable stress on
    credit markets and therefore presents considerable opportunities for specialist
    lenders to generate high returns
  • Mezzanine Funds:  Our portfolio companies are performing well and our mezzanine funds continue to
    show top quartile performance versus private equity funds.
  • Credit Funds: Our senior loan portfolio has delivered a strong performance in the period, with
    default rates remaining at historical lows.
  • Longbow Real Estate Capital: We  are  delighted  by  the  success of the fundraising in a difficult
  • Investment Company (IC): The performance of the IC's portfolio remains strong.
ICP trades on a PER of 6, against a decade median of 12.7. Yield is 9.4%. PBV 0.63, PBV10 1.8. I am a holder of ICP, and view it as a buy at this level.

Spinoff mishaps
In August, Frog's Kiss wrote a post of where he went wrong with spinoffs. He related his purchase of spinoff Seahawk Drilling:
It started life with tons of cash, a huge discount to book value, and was in a super distressed segment of an industry.
 "Why wouldn't I be convinced it was a great buy?", he asked, rhetorically. He continues:
There were plenty of elements I should have identified - rapid cash burn, lack of interested buyers in old dry stacked rigs, difficulty in predicting a turn in demand for shallow water natural gas drilling ...
 He was happy to buy, though, because "it was a spinoff"; I'm assuming he's borrowing this idea from Greenblatt's "Genius" book. Frog states:
This is the absolute dumbest reason to buy a spinoff.  I simply extrapolated occasional past successes in spinoffs with the idea that by virtue of the transaction it would work out fine - similar to a mutual thrift conversion where there really are mechanisms that can minimize downside risk and offer nice upside by virtue of the transaction.
 His blog is high quality, and I urge you to check it out.

Analysis Paralysis
Excerpts from a post by Geoff Gannon, "Analysis Paralysis: Stop Thinking, Start Simplifying". Two statistics he looks at are:
  1. 10-year average free cash flow margin/Price-to-sales
  2. 10-year average ROE/ PBV
He looks for a 10% hurdle rate, and performs calculations based on tangible values.

There are some interesting comments to the post:
  • Klarman- The ability to distil two or three major themes out of an investment and get right to the heart of the matter is truly an art
  • Mauboussin in "More than you know" shows the research that indicates more information not to increase the accuracy of your judgement, but merely to increase the confidence in your judgement. More information and analysis has questionable usefulness. [I read the other day that people often make their best decisions when they need to go to the loo urgently]
  • Personal experience suggests that a categorical "yes/ no" investment decision is reached after 10-20 hrs. Any longer and it's not 'screaming cheap' and you risk fooling yourself.

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